Breakeven analysis.

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Breakeven analysis

The breakeven point for a firm is when total costs equals total revenue. Expenditure and income are the same and the firm makes neither a profit or a loss. If the firm can sell at production levels above this point, it will be making a profit. If sales fall below this point, it will be making a loss. Establishing the breakeven point helps a firm to plan the levels of production it needs to be profitable.

Before you can calculate the breakeven point, you need to separate the firm's costs. These include:

Fixed costs

These are constant and do not change however many goods are produced. They include rent and insurance.

Variable costs

The firm's variable costs include raw materials and wages. You need to calculate the variable costs per unit. These costs increase in direct proportion to the number of units produced.

Sales output

You need to establish how many units are to be produced.

Sales price

You need to know the selling price of the units.

Once you have the above information, you can begin to calculate the breakeven point. You do this either by